Thursday, March 05, 2009

Bank Of England Starts Quantitative Easing

As expected, the Bank of England reduced short-term interest rates to 0.5% today, leaving them with little room to cut further. But no need to worry (in case you did worry about it inflating too little), the Bank of England will now start what is called "quantitative easing", which is to say purchasing assets and paying for them with money created "out of thin air".

Unlike the Fed, the Bank of England will focus on government securities (though some private assets might be bought as well), buying £75 billion of them in a first step and an additional £75 billion later.

Similar moves in America by the Fed have had some success in boosting the money supply, but no success at all in reviving economic growth. There is little reason to believe the Bank of England's moves will work better.

5 Comments:

So, the age of the printing press is back. Is anyone actually NOT predicting hyper-inflation at this stage? What do they think they are going to accomplish? The economy magically restoring itself? I don't think they even believe it themselves.

Is it time to wave the british pound goodbye? The US dollar? Is it time to wave the world as we know it goodbye? I wish someone could explain how this is not going to destroy the world economy. Yeah, that would be nice...

According to bank of international settlements, european banks face a US dollar 'funding gap' of almost $2 trillion.

The BIS said European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. The currency mismatch has become a potential risk for banks as the dollar continues to climb against the euro and Swiss franc, and especially sterling and Sweden’s krona.

What do u think of the above statement? Why are people still thinking that US dollar will continue to strengthen with this piece of information?

I've seen commentators who where previous inflation doves who just a couple of months ago thought deflation was the biggest threat starting to get worried about future inflation..

As for if it makes a difference that the dollar is a reserve currency - my take on it would be "yes, to a degree".Investors around the world flock to the dollar as a perceived "safe haven", which means there is a lot of non-domestic demand for dollars even when supply increases. The same cannot be said for a currency that has little to no use or demand outside of its own domestic market..

Whether or not the dollar _actually_ is a safe haven or not is a completely different issue..

There is a division of opinion as to the likely effects of this. The consensus is that it will not encourage further borrowing and that people, being scared for the future, will not go out and spend money. This in turn will make businesses reluctant to seek credit. In other words, it is pointless.

If that is the case, nothing is added to inflationary pressure. But...

Production is declining and will not be re-started quickly, as supply-chains are broken. Which is storing up inflationary pressure.

And...The British government's finances are in a mess. Tax revenues are falling. Expenses are rising. Borrowing is rising. This is a temptation to inflation.

What should the British government do? The country's infrastructure is in need of renewal and improvement. The spare capacity in the economy should be used for this purpose, using borrowed money. This will increase the country's productive capability in the future and lead eventually to a return to economic growth. From this perspective, recession is an opportunity to catch up with the housekeeping. But it will have to be paid for and the problem is that the existing UK tax system is inherently destructive. Higher taxes will nip recovery in the bud. The UK is urgently in need of tax reform, with a move to non-destructive taxation such as that which falls on the rental value of land. Good infrastructure sustains and enhances land value so this would intiate a benign cycle. see here for explanation

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